Returns Management: How to Convert Trash to Treasure

More than 50 percent of companies are not managing their returns because they lack a strategic focus on the issue and can't see how such a focus would help their bottom line, says Jeff Woods, research vice president of the Gartner Group, Stamford, Conn.

"Generally there is room for huge improvements in returns," says Woods. "The problem is, for most people it's a small enough issue that they are not intensely focused on it. That's the odd difficulty of the whole thing and it's frustrating."

Moreover, measuring a company's returns process, determining how it affects the bottom line and achieving quantifiable results, are difficult tasks. "The cost of a return doesn't just fit into one spot-you've got marketing, sales and inventory," says Dale Rogers, chair of the Reverse Logistics Executive Council at the University of Nevada, Reno. "Most accounting systems can't handle that, so it gets folded into the cost of doing business." Rogers also is professor of supply chain management and director of the Center for Logistics Management at the university.

There also are status issues involved. "It's not the proudest thing the company does," says Rogers.

In addition, companies must plan for the physical flow of returns. "Product distribution centers usually are made to flow product forward," he says. "There is a huge difference between backward and forward flow. The distribution center manager, the inventory manager-their job is to get the good stuff out, not the crummy stuff back."

Joan Starkowsky, president of Roadway Reverse Logistics, now a part of Yellow Roadway Corp., Overland Park, Kan., cites several barriers to a good returns program: the lack of an owner or overseer of the process, an inability to quantify the cost, inadequate information and process visibility, little or no technology to handle the returns process and limited personnel resources.

"It is a hard sale for companies like us to find the person who owns the returns process," she says.

As a result of these issues, "most companies don't realize how valuable their trash is," says Rogers. "Look at eBay. Who would have thought?" While returns may not seem like a key part of a strategic offering, they can be, he says. "Remanufactured, reused product sometimes is more profitable than new product. An example is used cars, which often have a higher margin that newly manufactured vehicles.

Indeed, a well-managed returns process can reap huge benefits for a company-but it also can be very expensive. While Rogers estimates the value of all returns at around $50bn, Woods says that returns cost companies, on average, between $20 and $30 per item.

"It can be a very, very expensive process if it isn't managed correctly," says Woods. "The business cases [for proper returns management] look really solid because returns are really expensive."

Many companies turn to third parties to manage returns because they lack expertise in this area. Even companies with low-value goods can save money by outsourcing their returns process, says Rogers. Returned goods typically are donated, recycled or destroyed. In the case of groceries, for example, returned products may be turned into animal feed or fertilizer.

Aside from cost savings, there are many reasons a company may want to improve its returns, from being a good neighbor, to quality control, to legal disposal issues, such as a product recall, says Rogers. "There are issues with unsaleables. One is the flea market problem. What happens is some stuff shows up in a flea market somewhere, and you don't necessarily know what has happened to that product," he says.

Changing TimesSo, while today many companies are not managing their returns as well as they could, interest is growing in improving the returns process. "I think there has been a big change in the last 10 years in how companies handle their returns," he says, noting that he has seen increased interest on the part of companies in most industries. The majority of big retailers and manufacturers have a returns process in place today, he says.

Starkowsky agrees that interest in returns has risen significantly in the last two to five years, particularly as companies have downsized and are looking for ways to cut costs. The surge of interest began "when shopping on the internet started becoming a big issue," says Starkowsky. With the rise of the internet came technology to manage the process, she adds. Before, most returns were handled manually.

"They want to share expensive parts among as many clients as they can."- Rob Kass of Choice Logistics

Rogers predicts that interest will increase as the United States tightens its recycling laws, becoming more in line with European recycling legislation. In Europe, the producer of a product is responsible for its disposal, even if it doesn't own the item. For example, a car manufacturer might be responsible for removing a car from a river, even though the vehicle was long ago purchased by a consumer. If such rules cross the ocean, manufacturers and retailers will be forced to manage returns more carefully than they do now.

New technology is adding to the interest. Technology companies such as eBoomerang, San Jose, Calif., Manhattan Associates, Atlanta, and Newgistics, Austin, Texas, as well as third-party logistics providers such as Roadway Reverse Logistics and Genco, Pittsburgh, have developed technology to make it easier and more profitable for companies to manage their returns.

Aerosoles, a women's shoe retailer based in Edison, N.J., has been using Newgistics for its catalogue and internet returns since 2003, says Magnus Gustafsson, vice president of direct marketing for the company. With an easy returns process, new and hesitant customers are more likely to order for the first time, he says.

"Bad or inconvenient returns definitely can impact customer retention," says Jonathan Dampier, vice president of marketing for Newgistics. He says that a Harris poll the company sponsored showed that 85 percent of shoppers said if they experienced a bad or inconvenient returns process they would never shop with that retailer again, while 92 percent said they would if they had a great experience.

Smart ReturnsNewgistics has developed a returns service and labeling technology that allows companies like Aerosoles to manage their returns before they arrive at the warehouse, improving customer service, lowering costs and increasing efficiencies. The company's flagship product, SmartLabel is a combination of a barcode label, software and processes. It gives retailers visibility to what is being returned to their warehouses so that they can prepare for the return, streamline their operations and improve customer service.

"The best way to describe our value proposition is we provide our customers $5 in value for every package we move for them, on average," says Dampier. Newgistics' customers include Neiman Marcus Group, Dallas, Lands' End, Dodgeville, Wis. and Frederick's of Hollywood, Hollywood, Calif.

With Newgistics' SmartLabel and related processes, Aerosoles now knows when goods are being returned and where from, says Gustafsson. About 75 percent of customers returning goods use the SmartLabel, a shipping tag provided with the merchandise at delivery that contains all the information on that shipment and can be used to generate return credit and track the goods as they move back to the retailer.

"Customers are comfortable with the process and they understand how it works," Gustafsson says. "Our feedback is that it has made the returns process very easy for them." As a result, "they are more likely to shop with us. In the past they may have browsed, and then gone to a retail shoe outlet to try shoes on."

Having an easy returns process also has helped the company manage the costs associated with returns. "We can manage costs earlier and more precisely, and be more proactive as opposed to reactive," Gustafsson says.

Returns are one area where customer service intersects with supply chain issues. A company can improve both at the same time, for example, by eliminating or reducing telephone calls through proactive e-mails to the customer, says Dave Hommrich, senior director, reverse logistics management, Manhattan Associates. Its web-based, stand-alone software manages the returns process for large, multi-channel retailers, including disposition, refurbishment or disposal for companies. The software prints out carrier-compliant barcode labels, allowing a company to manage returns using a variety of carriers.

Making MoneyWhile retailers are using returns for customer retention, others, such as Fremont, Calif.-based Network Equipment Technologies, manage their returns because their products are either expensive-and thus should be refurbished rather than thrown away-or in use as part of a year-round 24/7 operation.

Net.com, with annual revenue of $114m, provides expensive telecommunication equipment to governments, telecommunication carriers and medium to large companies such as Microsoft that need these parts to be up and running all the time, says John Guisto, vice president of global services.

Net.com implemented a returns process for its maintenance business using Choice Logistics, a New York-based third-party logistics provider specializing in returns management for technology companies. Choice Logistics is managing all of Net.com's spare parts business, worth about $9m.

"The cost of a single returned item could be $24,000," Guisto says. With such expensive parts, Net.com wanted to be able to track them and recycle where possible.

Parts are consolidated at a Choice distribution facility and parts needing repair are shipped back to Net.com. "The best thing from my perspective is I don't have to worry about any of that," says Guisto. Net.com has been managing its returns for about 20 years and working with Choice for about four, he says.

"Up to about seven years ago we had to do all this on our own. It took a bunch of people a lot of time and we were nowhere near as efficient," he says. "Before we implemented Choice, we probably had 16 people working on returns. Today I have two." Net.com also relies on Choice's cycle counts instead of performing an annual physical inventory count, which used to take about a month out of the year. "It's amazing. We used to have parts all over the place. We've been able to really consolidate with Choice."

Rob Kass, president and COO of Choice Logistics, says the company typically handles reverse logistics for high-tech products that are worth thousands of dollars on up. Those that cost less are for equipment that is required to be up and running around the clock-and therefore valuable to the operation as a whole.

Choice has more than 280 stocking locations and seven distribution centers, so that parts can be stocked close to the end customer but not on site.

"The value proposition is they want to share expensive parts among as many clients as they can," says Kass. "They don't want to put it on a client site because then the item is dedicated to a single client."

Auto Parts in ReverseFountain Valley, Calif.-based Hyundai Motor America is another company using a third party for reverse logistics, in this case to fix and resell core automotive parts. For the past two years, Hyundai has relied on Roadway Reverse Logistics to process parts including automatic transmissions, power steering racks and CV axles.

Roadway picks up the parts at Hyundai dealers, inspects them at their facilities, transmits credit authorizations to Hyundai, sorts the parts and ships them to the re-manufacturer. Hyundai has reduced its transportation costs by about $250,000 per year by consolidating shipments sent to the re-manufacturer.

The process is easy: a dealer can request a pickup on Hyundai's web site or call an 800 number when it has 125 pounds of parts, usually one transmission or multiple smaller parts. Since the inspection is done sooner-not at the re-manufacturer-dealers get their credits, i.e., money, from Hyundai upon receipt at the core processing center, in one to three days versus two to three weeks.

Before implementing this returns process, dealers were shipping transmissions back individually to the re-manufacturer, says George Kurth, director, supply chain and logistics, Hyundai Motor America."The problem with doing it that way is it took a long time for dealers to get credit," says Kurth. It took several days for the less-than-truckload shipment to arrive at the processing center in San Diego, Calif., where it waited until it was consolidated to truckload to the re-manufacturer in Tijuana, Mexico. Then there was more wait time until those at the factory were able to inspect the items. Only after the inspection, two or three weeks later, were dealers given credit, he says.

"The dealer is our customer and our face to the [Hyundai owner]. We have to keep the dealer happy," says Kurth.

Roadway manages "anything that has to do with managing returns other than buying asset recovery products," says Starkowsky, and is focused on high-value automotive returns. It also handles some consumer products and retail.

Drugstores, grocery stores and others with low-value goods require a different returns logistics network, one with several locations around the United States to pick up and potentially destroy much of the returned merchandise, says Starkowsky. Roadway has three U.S. locations for returns where it consolidates items for shipment.

Companies can see an immediate 30 percent savings by checking returns to determine if the goods in the box are in the returns program, says Starkowsky. "We find things that are not on the program and not approved or are not the company's product. We've found bricks and golf clubs," she says.

Shipment consolidation is another key area where Roadway saves its customers money, in the hundreds of thousands of dollars. Starkowsky estimates that companies with revenue of more than $80m, or companies with high-value items, can save money using Roadway.

Steve Banker, service director, supply chain management, ARC Advisory Group, Dedham, Mass., notes that companies with large amounts of returns need to have dedicated warehouses for those returns, and begin managing their returns before they arrive. "The secrets of reverse logistics have been pretty well known for the last few years. Really, it is figuring out what to do before it gets to the warehouse. The secret is the return merchandise authorization step. That way, you make sure only the stuff that should be shipped is shipped," he says.